By Cordell Eddings and Matthew Brown Nov. 30 (Bloomberg) -- Treasuries fell as the United Arab Emirates’ central bank said it will back the state’s lenders as they face losses from Dubai World’s possible default. Ten-year note yields touched the lowest since Oct. 2 last week after Dubai World, a state-owned holding company, announced that it was seeking to delay loan payments. Government securities gained 1.3 percent this month, the most since March, according to Merrill Lynch & Co. indexes, as the Federal Reserve indicated it will hold its benchmark interest rate near zero. “Investors are still trying to figure out the longer term implications of what the Dubai story means,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets New York, one of the 18 primary dealers that trade with the central bank. “The markets have been generally very illiquid very the last few days so we are also settling back in.” The 10-year note’s yield increased three basis points, or 0.03 percentage point, to 3.23 percent at 9:35 a.m. in New York, according to BGCantor Market Data. The 3.375 percent security maturing in November 2019 fell 9/32, or $2.81 per $1,000 face amount, to 101 6/32. Two-year yields rose one basis point to 0.70 percent. They touched to 0.61 percent on Nov. 27, near the record low set Dec. 17. Dubai World A central bank statement on Nov. 4 repeated Fed’s view that it would keep the rate “for an extended period.” Policy makers reduced the target for overnight bank lending to a range of zero to 0.25 percent in December. Treasuries rose 2.3 percent in March, when the Fed began its $300 billion Treasury purchase program, part of an effort to cap consumer borrowing costs. The program ended in October. Treasuries may gain as investors buy the securities to match changes in the indexes they use to gauge performance of their portfolios as the benchmarks incorporate debt sold during the month. “We should see some month end buying into the afternoon,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. Dubai World, with $59 billion of liabilities, said last week it would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30. Dubai Swaps Asian stocks gained today the most in almost eight months after the Abu Dhabi-based regulator said it will lend to banks at a half-percentage point above the three-month local benchmark interest rate. The benchmark three-month Emirates interbank offered rate was 1.94 percent, dropping from 4.31 percent at the end of 2008, according to Bloomberg data. The cost of protecting Dubai government notes from default more than doubled last week to 6.47 percentage points. The swap contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. Dubai credit-default swaps fell for the first time in a week today, decreasing 0.69 percentage point to 5.78 percentage points, according to prices from CMA Datavision. Nakheel PJSC, the property company that is owned by Dubai World and wants to defer payment on its bonds, asked Nasdaq Dubai to suspend trading in the securities until it provides information to the market. Interest Expense The unemployment rate probably held at a 26-year high of 10.2 percent in November, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports the figure on Dec. 4. Even as the nation’s debt increased by $1.15 trillion this year to $6.95 trillion in October, the government’s interest expense under Treasury Secretary Timothy Geithner dropped 15 percent, the biggest decrease since before 1989, according to data compiled by Bloomberg. Less than a week after deflecting calls for his resignation, Geithner sold bonds on behalf of U.S. taxpayers at the lowest yields on record. The Treasury auctioned $44 billion of two-year notes Nov. 23 at a yield of 0.802 percent, the lowest level on record. The economy will likely expand 2.6 percent in 2010, after the government and Fed lent, spent or committed almost $12 trillion to keep financial markets from collapsing, according to the median estimate of 63 analysts surveyed by Bloomberg. That’s in line with average growth of 2.63 percent from 2002 to 2007. ‘Many Criticisms’ “There have been many criticisms of him, but he’s done a good job,” said Tsutomu Komiya, who invests in Treasuries for Tokyo-based Daiwa Asset Management Co., which oversees $77 billion in assets. Yields will rise as the U.S. economy improves, Komiya said. A survey of investors by Ried, Thunberg & Co. shows fund managers became more bearish on the outlook for Treasuries for the rest of 2009. The company’s index measuring investor sentiment toward government debt fell to 46 for the seven days ended Nov. 25 from 47 the previous week. A reading below 50 shows investors expect prices to fall. The economic analysis company based in Jersey City, New Jersey surveyed 27 fund managers controlling $1.41 trillion. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net.

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